Planning for Retirement

[clean]

When you're a student, an extra $10k/year makes a huge difference to your quality of life: it's microwave food vs. restaurants. Or living in a rat infested building with a roommate vs. having your own, livable place. If they inherit money when they're 60, it's unlikely to have any impact on their standard of living -- and so effectively distributing the (expected) inheritance early on makes much more sense.

For what it is worth, consider that your children may be more grateful that you are set up for a self sufficient retirement, more than they may enjoy an extra restaurant meal while in college. IF part of someone's financial plan defaults to 'my kids will take care of me' (for whatever reason), that may be a mistake.  The summary is that whatever your plans are toward helping your children through graduate school (especially when it concerns the luxuries mentioned), please make sure that you have enough saved to take care of your own retirement, health, nursing home, and final year's maintenance costs. (An extra $10,000  invested for 30 years or more would cover a lot of care that your children will not have to worry about). 

So please be generous to your children while the children will appreciate it in graduate school, but I hope that no one is doing this before fully covering his/her own expenses, including the final years' expenses. 

There is of course the worry about what care needs I will have in my old age, and what my medical costs will be. Any estimates I see of those for the next 30 years are pretty scary.

And one's children would probably not want the pressure of trying to cover those costs for their parents, especially IF their parents could have saved for those costs earlier.

[spork]

I probably wasn't clear in my last post -- it got truncated because of other attention-demanding tasks.

Even though the financial planner might say that she gets no commission from the insurance policies, you know she gets commissions if you act on her advice to buy or sell other financial instruments. She could very well get some kind of bonus if she meets a certain quota of transactions -- e.g., if she is a franchisee of a financial services company. Or she might simply be giving people bad advice.

[Antiphon1]

I probably wasn't clear in my last post -- it got truncated because of other attention-demanding tasks.

Even though the financial planner might say that she gets no commission from the insurance policies, you know she gets commissions if you act on her advice to buy or sell other financial instruments. She could very well get some kind of bonus if she meets a certain quota of transactions -- e.g., if she is a franchisee of a financial services company. Or she might simply be giving people bad advice.

This.

We quit our (ahem) financial planner when they demanded we include our tax returns in their files.  Not gonna happen.  Stock brokers (financial planners) are in sales.  Beyond an estimate of annual income, they don't need personal financial information.   

You and your partner/family need to know your financial instruments.  The service people can help you choose the instruments you ask about, but they certainly shouldn't get permission to figure out how to spend your money for you.  Educate yourself before you visit any financial provider.  You should know your goals and some options before you ask for help.  Be a smart consumer. 

[pigou]

The majority of the estate will likely go to other causes.  My daughters would be well taken care of but I feel like the majority should be left to causes I think would benefit others.  So,  I disagree with John Adams' quote.

These questions, of course, come down entirely to personal preferences. So I don't think there's any "right or wrong."

But if you want some food for thought, I'd note that for someone who is talented and accomplished, it's much easier to turn down a $300k/yr job on Wall Street and do unpaid work on a pro-social startup when they have assets to live off of. And more often than not, the limiting factor for social impact is not that existing charities don't have enough money, but that most existing charities get a ridiculously low return for the money they spend. (Even supposed-accountability services like Charity Navigator just look at what fraction of money goes toward administrative expenses. In that world, evaluating the impact of your projects is a non-program expense and hence counts against you. But it wouldn't matter if every last cent went to actually delivering programs if it turns out that the programs don't impact the desired outcome.)

The summary is that whatever your plans are toward helping your children through graduate school (especially when it concerns the luxuries mentioned), please make sure that you have enough saved to take care of your own retirement, health, nursing home, and final year's maintenance costs. (An extra $10,000  invested for 30 years or more would cover a lot of care that your children will not have to worry about).

To the extent that saving for one's own retirement comes first: obviously true and thanks for making that point. But keep in mind that the income of children is not exogenous. The amount of money I spend on ("invest in") them when they are young can materially impact the earnings they make in the future.

If they don't have to worry about money and can take an unpaid internship (vs. work at Starbucks), that experience is going to increase their chances of getting a high-paying job later. If they can afford to go out with well-connected students, then that social network can again translate into higher salaries. This often gets lost when people speak of "partying" or "wasting" money on luxuries: participating in social activities is how you build a social network and there are substantial economic and personal returns to those.

This is exactly the systemic inequality that we often discuss as obstacles for people from low-income households. The flip-side is that not making the investments when you can afford it does deprive them of an opportunity.

[polly_mer]

The summary is that whatever your plans are toward helping your children through graduate school (especially when it concerns the luxuries mentioned), please make sure that you have enough saved to take care of your own retirement, health, nursing home, and final year's maintenance costs. (An extra $10,000  invested for 30 years or more would cover a lot of care that your children will not have to worry about).

To the extent that saving for one's own retirement comes first: obviously true and thanks for making that point. But keep in mind that the income of children is not exogenous. The amount of money I spend on ("invest in") them when they are young can materially impact the earnings they make in the future.

If they don't have to worry about money and can take an unpaid internship (vs. work at Starbucks), that experience is going to increase their chances of getting a high-paying job later. If they can afford to go out with well-connected students, then that social network can again translate into higher salaries. This often gets lost when people speak of "partying" or "wasting" money on luxuries: participating in social activities is how you build a social network and there are substantial economic and personal returns to those.

This is exactly the systemic inequality that we often discuss as obstacles for people from low-income households. The flip-side is that not making the investments when you can afford it does deprive them of an opportunity.

I was just reading about that reality in https://www.theatlantic.com/magazine/archive/2018/06/the-birth-of-a-new-american-aristocracy/559130/ that was prompted by https://www.nytimes.com/interactive/2019/08/01/upshot/are-you-rich.html .

One reason we live in the community we do is the opportunities.  Some of that is concrete like my employer that has a vibrant formal apprenticeship program as well as paid internships that start in high school.  Some of that is more social: when "all" the other kids are going to STEM camp, then you start asking to go, too, and make those friends with whom you keep in touch "forever". 

Like pigou, I am familiar with research like https://www.pbs.org/newshour/economy/if-you-grew-up-poor-your-college-degree-may-be-worth-less.  "If you've ever had to pick people for your group or team, chances are you asked your friends to recommend people they know. In much the same way, nearly 80% of the positions available are usually filled through personal referrals." (ibid)  If you're not in the network, then you won't get the niftiest job offers because they are going to friends of a friend, especially if it's not exactly clear what formal education qualifications are required to succeed at the job so recommended friend of a friend is probably good enough and therefore a formal job ad will never be issued.

Likewise, "fit" is not just a term for the TT search.  The PBS article has a great anecdote on how the author did not fit by her clothing choice, but changing it made all the difference.

I would add that this emphasis on "fit" applies to all facets of education and the workplace. Local communities often recruit from local colleges and universities, and recruiters are just as likely to prefer to hire graduates with strong connections to peer groups and alumni. The difficulty is that participation in structured extracurricular activities is a luxury that working-class students often cannot afford. Many of the working-class students I taught worked during the school year to help defray the costs of their college education. This puts them at a disadvantage in securing jobs after graduation. And that disadvantage too often leads to reduced lifetime earnings.

Reference: https://www.pbs.org/newshour/economy/if-you-grew-up-poor-your-college-degree-may-be-worth-less

This social network situation is related to some of the tragedies of death-marching adjuncting instead of jumping to another area.  People who have great networks with many educated people doing interesting, high-enough-paid work with their degrees are more likely to be able to transition in a shorter time to a good enough position.  People who are applying blindly to formal job ads trying to make a hard transition are much less likely to get that new middle-class job when people with directly related experience exist and are also applying. 

The trap was enhanced by the assertion that formal credentials through school are more important than the human aspect.  The Atlantic article kept bringing up The Great Gatsby as an example of how the human aspect and the realities of social class in even in modern America combine in unfavorable ways for those who focus purely on the transactional, credentialing mechanism at the expense of the human factors.

 

[punchnpie]

Well, I finally did it - I retired at the end of July. I guess the feeling I have in the evening of 'gotta stop what you're doing now and get ready for work tomorrow' will eventually pass, but it's weird.  No immediate plans, though some interested parties have asked me about consulting, so I'll probably do that after a bit, but not much. I wanna see how this 'not having to worry about anybody but myself' thing works out.

[clean]

Well, I finally did it - I retired at the end of July.

Congratulations!!

If you dont mind answering, did you retire on a defined benefit pension plan or did you save with a defined contribution (403b type) plan?

Are you going to celebrate in any notable fashion?  (Take a cruise or some other trip to mark the event?)

[aside]

Congratulations, indeed!  Let us know how it goes.

[monarda]

wahoooo! Way to go, punchnpie. Congratulations!

[larryc]

The comfort of my retirement depends in part of the stability of the State of Missouri pension system. Missouri is a red state. I'm probably screwed, but too scared to look.

[Vkw10]

The comfort of my retirement depends in part of the stability of the State of Missouri pension system. Missouri is a red state. I'm probably screwed, but too scared to look.

The Pew report https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/06/the-state-pension-funding-gap-2017 suggests that Missouri's pension system is a bit better than average state. 79% funded, but net amortization at 104% so they're slowly improving funding level. Congratulations!

My red state recently approved increase in employee contributions for next year. While I'm not looking forward to contributing more, I want a stable pension.

[craftyprof]

I am in year 7 of a 20 year mortgage at 3.375 percent. Maturity date is coincidentally when I hit 65 years of age. I hope to pay off the mortgage a few years early and put the $1,400 that I pay monthly in P&I into a Roth IRA and other investments instead.

Check the math on this plan.  With that low of an interest rate on the mortgage, putting your "extra payments" into an index fund (which should average a 10%ish return) in the IRA may net you more money.

[clean]

Check the math on this plan.  With that low of an interest rate on the mortgage, putting your "extra payments" into an index fund (which should average a 10%ish return) in the IRA may net you more money.

Check that math too.  What is the standard deviation of that 10% return, and is that 10% return based on long, long term averages that are not necessarily likely to be sustained with the current population.  (Not to be too technical, but the historic return of the stock market is often quoted to be 11.8% since 1930 or something like that.  However does today's economy resemble the 1940s, 1950s, ... or has the population changed where there will be less invested in the market as boomers dissave to fund their retirements?... Rhetorical questions, but food for thought.  Should one use 10% rates in this economy and environment for long term planning anymore?)

Paying down a mortgage is a low return investment, but it is a risk free investment! 

The advice to delay paying down the house (or worse, to get a home equity loan) and instead invest in the stock market comes around periodically. But with any cycle it comes and goes.  It was heard a lot in the late 90s (before the 'dot com crash') and again in mid 2000s (before the 2008/2009 market crash).  I didnt hear much of it in 2010, though.  I wonder why? (I dont really wonder why). 

I do wonder how many people invested in the market who could have paid off their house are still paying off their house because they lost that money in the stock market? 

I will caution readers to take my advice with a grain of salt, though.  As readers will know from my posts at the other forum, I paid off my house and invested what was a payment into my retirement accounts.  I am well on the way to retiring early (if the market doesnt wipe my too high equity allocation), with a paid for house.  Even IF I lose half my retirement funds, at least my house will still be paid for, and I will still be able to retire at a 'normal' age.

there is a lot to be said for a paid for house! 
I agree that there is a lot to be said for a high value portfolio, but the volatility (risk) of a portfolio is much greater than the security and peace of mind from a paid for house. 
(And as someone with both a paid for house and a reasonably sized portfolio, I can speak to both!)

[craftyprof]

I'm far more worried about what Boomers trying to downsize will do to the real estate market than what their retirement portfolios will do to the overall economy.

Too many big houses sitting on the market because no one wants them anymore...  Too many houses on the market in disrepair because people couldn't afford to maintain them after the last real estate bubble...  Too much competition for the sensible properties that give you the opportunity to age in place is pricing younger workers out of the market...

[polly_mer]

I'm far more worried about what Boomers trying to downsize will do to the real estate market than what their retirement portfolios will do to the overall economy.

Too many big houses sitting on the market because no one wants them anymore...  Too many houses on the market in disrepair because people couldn't afford to maintain them after the last real estate bubble...  Too much competition for the sensible properties that give you the opportunity to age in place is pricing younger workers out of the market...

That's the current fear here as we're looking at a large wave of retirements in basically a company town.  Job offers are being turned down because the trade-offs are bad for housing.  Usually, the trade-off is small town, not much to do, but a 3-4 bedroom, 2 bath house is pretty affordable or urban area with lots to do and you're living in a 1-2 bedroom, 1 bath apartment.  I continue to tell management the story about how a studio apartment here in a student-grade neighborhood cost me more per month than either of mortgages I'm paying off elsewhere on 4-bedroom, 2-4 bath houses.  That's not a happy situation for people who can get other jobs elsewhere and have a better trade-off for either more local amenities or substantially cheaper housing.

People are already commuting more than 4 hours per day to live in a more urban area with cheaper housing.  However, very few people do that for long because getting a good enough job in the more urban area is possible since our biggest competitor there has the same looming worker retirement wave.